Brand risk Towards a meeting of professional minds 2008 Palisade User Conference © David Abrahams 2008 david.abrahams@brandmediation.com 1 Brand Mediation © David Abrahams 2008 David Abrahams 23 years brand management, new product development and senior commercial management 10 years risk advisory Accredited commercial mediator (MCIArb) April 2008 2 Presentation © David Abrahams 2008 Overview Interest in brand risk – why? The marketing task Risk literacy – what? Analysts as advisors and facilitators “Meeting of professional minds” Useful frameworks 3 © David Abrahams 2008 Brands Acknowledged value Rank Brand Country of origin Sector Brand value (MM) 1 Coca-Cola US Beverages $65 324 2 Microsoft US Computer software $58 709 3 IBM US Computer services $57 091 4 GE US Diversified $51 569 5 Nokia Finland Consumer electronics $33 696 6 Toyota Japan Automotive $32 070 7 Intel US Computer hardware $30 954 8 McDonald's US Restaurants $29 398 9 Disney US Media $29 210 10 Mercedes Germany Automotive $23 568 Source: Interbrand (2007) 4 Brand risk? © David Abrahams 2008 Investor perspective Intangibles: an increasing proportion of enterprise value - Tangibles readily reproduced or supplanted - Well-managed brands appreciate with use - Risk-efficient growth Regulatory emphasis on forward-looking statements - Risks and opportunities (strategic, financial, operational) - Sustainability of demand - Stakeholder relations (not limited to customers) Brand exposure to corporate conduct - Reputation risk (“licence to operate”) - Reliance on third parties (outsourcing) - Merger and acquisition (discontinuity) 5 Marketing task © David Abrahams 2008 Professional challenge Critics - “Lack of financial accountability” - “Operational indiscipline” - “Creative for its own sake” IN FACT licensed (supervised) risk-takers - Markets: “open systems” (competitive; uncertain) - Innovation inherently risky (predict or shape demand) - Investment in stationary markets potentially ineffective (regression) MEANWHILE pressured for certainty of outcomes - Single-point targets (caricature: super-safe, overambitious or imposed) - Brand investment raids (short-term focus; contingencies removed) - Often no financial case for market research (value of new information) 6 Risk literacy © David Abrahams 2008 Opportunity for marketers Third necessary competence 1. Strategic insight 2. Financial understanding 3. Risk literacy Underpinning knowledge (conceptual and practical) - Awareness of risk attitude (self and others) - Techniques for risk analysis (sound decision-making) - Frameworks for risk management (operational effectiveness) Meeting of professional minds - Improved cross-functional communication (credibility) - Improved influence (“uncertainty absorption”) - Improved brand performance (pre-emption or preparedness) 7 Risk literacy © David Abrahams 2008 Meeting of professional minds How to achieve this? Common understanding of “brand anatomy” Risk modelling tools Mediating frameworks - Elicit risks and uncertainties - Operational relevance (marketers) - Applicable in modelling (analysts) 8 © David Abrahams 2008 Brand anatomy A three-part asset Legal asset (identity): protect rights Relational asset (people): build affinities Economic asset (value): maximise return Interdependent 9 © David Abrahams 2008 Brand anatomy Essentials Customers Employees Brand Community Investors Partners Regulators Source: Abrahams (2008), reproduced by permission of Marsh Ltd Possible : 1 stakeholder, 2 perspectives Mindjet MindManager Map Reality : overlap and interaction 10 Brand anatomy © David Abrahams 2008 Affinity can be measured and applied in predictions BrandDynamicsTM loyalty pyramid BrandVoltageTM conversion index Brand X 2007 45 Advantage 79 Performance 84 Relevance 93 Presence 94 ‘Bonding’ correlated with current sales share Source: Millward Brown, reproduced with permission Bonding Distributions for predictive modelling (growth) 11 © David Abrahams 2008 Brand risk assessment Three frameworks Brand valuation - Assess contribution and condition Dependency modelling - Structure marketing programmes + Marketing Due Diligence 1 - Challenge marketing plans 1 McDonald, Smith and Ward (2006) 12 © David Abrahams 2008 Brand valuation “Economic use” : NPV of attributable earnings Deduct operating costs and other charges = Net earnings Years 1-5 + Net earnings Years 1-5 + Reward contribution of tangible assets = Earnings from all intangibles Earnings from all intangibles Adjust intangible earnings for direct role of brand = Earnings from brand alone = NPV Years 1-5 + (brand value) Revenue Revenue forecast forecast Years Years 1-5 1-5 ++ Earnings from brand alone Select discount rate on brand strength and apply RISK 13 Brand valuation © David Abrahams 2008 Brand strength factors (example) Source: Abrahams (2008), after Lindemann (2007) Mindjet MindManager Map 14 Economic use valuation © David Abrahams 2008 Review Comparable royalty rate for perspective (available?) Exercise of judgement (risks and uncertainties) Valuation changes with context (“use”) Other dependent cash flows (deducted) Benefits of process (recognition; due diligence) Balances short-term and long-term thinking (consistency) 15 Dependency modelling © David Abrahams 2008 Intuitive beginning Mindjet MindManager Map 16 Dependency modelling © David Abrahams 2008 Essentials Fault tree variant Positively phrased - Stated marketing objective(s) - What needs to go right - Descending hierarchy of events (dependencies) Logic gates - AND (systemic weakness) - OR (systemic strength) - Input failure rates for lowest-level events (primary or not modelled) 17 Dependency modelling © David Abrahams 2008 Without failure rates Illustrative example (product introduction – detail) Mindjet MindManager Map 18 Dependency modelling © David Abrahams 2008 Uniform failure rate added 0.1% failure rate 10% failure rate Illustrative example (product introduction – detail) 1% failure rate 10% failure rate Compare 10% failure rate 19% failure rate 13% failure rate 2% failure rate 10% failure rate 10% failure rate 10% failure rate A uniform 10% failure rate for all Mindjet MindManager Map inputs reveals structural influences on risk before these are obscured by the different failure rates for each item 19 Dependency modelling © David Abrahams 2008 Review Key benefits - Tests operational assumptions (or understanding) - Makes risk relevant (including mitigation planning) - Captures and keeps knowledge Key features - Reflects sensitivity to common root causes - Reveals counter-intuitive outcomes (system effects) - Calculates expected value of mitigation steps Key considerations - Structure - More detail predicts higher failure rates? - Closed system 20 Marketing Due Diligence 1 © David Abrahams 2008 Recognising risk in marketing plans Source: 1 McDonald, Smith and Ward (2006) Mindjet MindManager Map 21 Marketing Due Diligence 1 © David Abrahams 2008 Recognising risk in marketing plans Source: 1 McDonald, Smith and Ward (2006) Mindjet MindManager Map 22 © David Abrahams 2008 Dependency modelling Applying due diligence criteria to failure estimations 1 Source: 1 McDonald, Smith and Ward (2006) Mindjet MindManager Map 23 Conclusions © David Abrahams 2008 Towards a meeting of professional minds Fundamentals - Marketing must retain its “culture of advocacy” (appropriate risk-taking) - Risk awareness comes with experience (junior < senior) - Different degrees of mathematical tolerance (personalities; functions) Positioning - Risk literacy: add to quality of the plan (success) - Risk literacy: learn how to take risk (decisions) - Risk literacy: communicate with credibility (influence) Quantitative analysis - Simplify to illuminate (materiality; decision-makers’ eyes) - Always in tandem with qualitative analysis - Avoid isolation (link to operational plans) 24 Brand risk References and bibliography Abrahams, D.J. (2008), Brand Risk: Adding Risk Literacy to Brand Management, Gower Arium Ltd. (2003), Making Sense of an Uncertain World, http://www.arium.co.uk/products/dependency.htm Interbrand (2007), All Brand Are Not Created Equal: Best Global Brands 2007, Interbrand in association with BusinessWeek Lindemann, J. (2007), Brand Valuation: The Economy of Brands, Interbrand Mando Brand Assurance, http://www.mando.co.uk/ McDonald, M., Smith B. and Ward, K. (2006), Marketing Due Diligence: Reconnecting Strategy to Share Price, Butterworth-Heinemann Millward Brown BrandDynamicsTM, http://www.millwardbrown.com/Sites/MillwardBrown/Content/Services/BrandDynamics.aspx Mindjet, LLC, http://www.mindjet.com/us/products/mindmanager_pro7 Palisade Corporation, http://www.palisade-europe.com 25 david.abrahams@brandmediation.com 26 Brand risk Towards a meeting of professional minds 2008 Palisade User Conference © David Abrahams 2008 david.abrahams@brandmediation.com 27